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Wednesday, Aug. 27, 2008 | A conventional wisdom is emerging among those in and around city government that San Diego can’t afford not to go ahead with a proposal to build a new $440-million City Hall.
In a traveling road show of sorts put on by the Centre City Development Corp. over the past couple weeks, officials have been telling residents that the city will save a ton of taxpayer dollars in the future by going with the project proposed by Portland-based builder Gerding Edlen rather than continuing to lease more than a half-million square feet of downtown office space.
The savings, officials say, will be as much as $62 million over the next 15 years, and more than $400 million over 50 years.
“If these numbers are right, it looks like it’s riskier not to do it, than to do it,” said City Council President Scott Peters, echoing the sentiments of several others who have been briefed on the proposal that calls for the new City Hall to be built by 2013.
The project’s boosters speak in general terms during their presentations about how the city will save over the long haul by reducing its footprint and becoming an owner rather than a renter. However, they don’t tell the public exactly how the city will achieve this savings, especially in the early years.
A close look at the numbers reveals that in the project’s first 15 years almost all of the savings would come one of two ways: either through the sale of city-owned buildings to Gerding Edlen; or, in the unlikely event that the company doesn’t buy the buildings, a one-time payment from the developer to the city, plus the leasing of city-owned parking spaces.
Under the proposal’s so-called “best-case scenario,” the city would realize its $62 million savings through 2022 largely by selling Gerding Edlen two buildings and the land underneath them in the Civic Center Complex for a total of $67 million. A long-term lease on the land is another option under consideration.
Either way, the proposal calls for the developer to build a new City Hall, and then redevelop the entire C Street block encompassing the Civic Center Complex by 2018.
In the event that Gerding Edlen backs out of the surrounding development after building City Hall, the city would still net $14.4 million, according to CCDC, the city’s downtown redevelopment authority. The company has agreed to pay a non-refundable deposit for the buildings it intends to buy; and, because there would be underground parking at the new City Hall, the city would be able to lease parking spaces in the already-existing Evan Jones Parkade.
Neither of these scenarios sits well with Councilman-elect Carl DeMaio, who has been an early, and lonely, critic of the project.
“This is not savings,” DeMaio said. “This is selling land, anybody can sell land.”
DeMaio insists that he is not against the idea of building a new City Hall at some point. But he doesn’t like the timing or the scope of this proposal, saying it is too grandiose for a city with such terrible finances as well as bad roads and other crumbling city infrastructure. And, he said, plans for a new City Hall should be integrated with other long awaited projects like a new downtown library, and be paid for with a $200 million infrastructure bond.
As things stand now, the city houses its employees in about 1 million square feet of space in eight different buildings downtown, with the vast majority of the square footage at the Civic Center Complex, which includes city-owned buildings such as the City Administration Building, the Civic Theater, the City Operations Building and the parkade, and the privately owned Civic Center Plaza.
The city began outgrowing its original 1960s-era footprint decades ago, and now leases more than half of the space — 550,000 square feet — its employees occupy. The city-owned buildings, meanwhile, are full of asbestos, short on fire sprinklers and vulnerable to earthquakes. Officials have been commissioning studies for a new City Hall the since the late 1980s.
The clamor for a new building has grown louder in recent years as the city gets closer to the day when its current leases expire. By 2014, the city will have to renew its leases, and its annual payments will increase by between $5 million and $6 million if it does nothing, according to CCDC estimates.
The fact that the city is considering such a complex financial arrangement with a private business is largely a result of the city’s financial struggles. Without enough money to finance the project itself, the city is counting on a private developer to build its new home in exchange for an agreement for the city to either sell prime downtown real estate or hand over its rights to build on it.
In July 2007, CCDC put out a request for qualifications, and by December had narrowed it down to two proposals; the Gerding Edlen plan and one by Hines Corp.
Hines had proposed to just build a new City Hall without the corresponding redevelopment. But a financial analysis of the two projects showed that the Gerding Edlen proposal, with its building purchases and redevelopment, would put more money back in the city’s coffers. So Hines withdrew its proposal Aug. 15.
Gerding Edlen’s proposal is ambitious. The company proposes a wholesale redevelopment of the Civic Center Complex, with the centerpiece being a 1 million square foot, 33-story City Hall built in the shape of a sail.
The proposal calls for Gerding Edlen to finish the new City Hall by 2013. Then the city, through a public financing authority, would begin a 30-year lease-to-own arrangement on the building. Initially, city employees would occupy about 700,000 square feet of the new building, and Gerding Edlen would lease the rest out as office and retail space.
In addition to building the new City Hall building, the developers are proposing to purchase the City Operations Building and the parkade and develop the area into office, residential, retail and possibly hotel space. Gerding Edlen would pay the city market rate (currently $67.4 million) for those buildings and the land. CCDC is also considering a long-term lease option, under which the city would instead lease the land under the buildings to the developer for 60 to 70 years.
If Gerding Edlen does all of this, the city’s net costs through 2022 would be $318 million. CCDC arrives at this number primarily by taking the city’s gross costs — most of which are the lease payments for the new City Hall — and subtracting out the $67.4 million Gerding Edlen is paying for the buildings. It also includes nominal sales tax revenues it would get via the retail development.
This compares to $381 million CCDC estimates the city would spend if it continues to lease the buildings it is now leasing at higher rates.
Over 50 years, the city would incur $628 million in costs in 2013 dollars under the Gerding Edlen proposal compared to more than $1 billion it would have to spend if it did nothing now, but still had to have a functioning City Hall in a generation, according to CCDC estimates.
The new City Hall will be built and financed entirely separate from the other redevelopment. And officials from both Gerding Edlen and CCDC say that the company will assume all of the risk related to the redevelopment.
“There are no giveaways — we are paying market value for the dirt, and there are no public subsidies getting funneled to us, period,” said Tom Cody, a Gerding Edlen executive.
If Gerding Edlen, for whatever reason, doesn’t complete its redevelopment plans after building the new City Hall, it would still be on the hook for a 10-percent, non-refundable deposit on the two buildings, according to CCDC.
The city would still have underground parking at the new City Hall building as well as its old parking structure. CCDC estimates that it would realize $19.3 million in revenues by 2022 through leasing spaces in the parking structure.
“The only commitment the city is making is a lease on 700,000 square foot of space,” said Jeff Graham, CCDC’s assistant vice president for redevelopment. “At the end of 30 years, the bond is paid off and the building becomes the city’s.”
Cody and Graham have spent the past two weeks presenting the proposal to neighborhood groups. San Diego City Council will be shown the proposal on Oct. 21, and vote whether to initiate an exclusive negotiating agreement with Gerding Edlen. The final decision on the proposal will come next year.
DeMaio has attended a couple of the neighborhood meetings to argue against the proposal, calling it an idea officialdom wants to shove down the taxpayers’ throats.
“It’s a classic case of ‘shut up and swallow,’” DeMaio said.
Mayor Jerry Sanders has yet to officially weigh in on the proposal, but has indicated that he would support a proposal that would not be a drain on the city’s budget.
“If this can in fact save taxpayers dollars, then it is a project that should be pursued,” said Sanders spokesman Darren Pudgil.